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Options Cheat Sheet Contents www.simpleoptionstrategies.com OPTIONS CHEAT SHEET CONTENTS OPTIONS STRATEGIES 3 EXPLANATION OF OPTIONS 5 OPTION TYPES 5 OPTIONS PRICING 6 THE GREEKS 7 OPTIONS EXPIRATION 8 PATTERN DAY TRADER (PDT) 9 OPTIONS TERMINOLOGY 10 2 www.simpleoptionstrategies.com OPTIONS STRATEGIES NET POSITION STRATEGY DESCRIPTION PROFIT/LOSS @ EXPIRATION Consists of buying calls for investors Long Call Net Position The potential profit is un- who want a chance to participate limited, while the potential + Long Call in the underlying stock’s expected losses are limited to the pre- appreciation during the term of the 0 50 55 60 65 70 mium paid for the call. option. - Consists of buying puts and will prof- it if the stock price moves lower. It Long Put Net Position is a candidate for bearish investors The potential profit is sig- + Long Put who want to participate in an antic- nificant, but the losses are ipated downturn, but without the limited to the premium paid. 0 50 55 60 65 70 risk and inconveniences of selling - the stock short. This strategy consists of writing Maximum profit of the un- (selling) a call that is covered by an Covered Call Net Position derlying stock is capped equivalent long stock position (100 by the option’s strike price + shares). It provides a small hedge on Covered Call and life. The main benefit is the stock and allows an investor to the option premium income 0 50 55 60 65 70 earn premium income, in return for - which lowers the stock’s temporarily forfeiting much of the break even cost. stock’s upside potential. A cash secured put involves writing (selling) a put option with the re- Limited to the premium col- Naked Put Net Position served cash. The strategy is to either lected or a substantial loss if + collect the premium if the stock rises the seller is unwilling to pur- Cash- Secured Put and expires out of the money or to chase the underlying stock 0 50 55 60 65 70 collect the premium and purchase at the strike price if the - the stock at or below the strike price stock expires in the money. if it expires in the money. Profit and loss are very lim- An investor writes a call option and ited, depending on the dif- Collar Net Position buys a put option with the same ex- ference between the strikes. piration as a means to hedge a long The issues for the protec- + Collar position in the underlying stock. This tive collar investor concern 0 50 55 60 65 70 strategy combines two other hedg- mainly how to balance the - ing strategies: protective puts and level of protection against covered call writing. the cost of protection for a worrisome period. 3 www.simpleoptionstrategies.com NET POSITION STRATEGY DESCRIPTION PROFIT/LOSS @ EXPIRATION Profit and loss are limited and well-defined. The initial Contains two calls with the same net credit is also the maxi- Bear Call Spread Net Position expiration but different strikes. The mum potential profit. Profits Bear Call Spread strike price of the short call is below at expiration start to erode + (Credit Call Spread) the strike of the long call, and will if the stock is above the low- 0 50 55 60 65 70 generate a net cash inflow (net cred- er strike price, and losses - it) at the outset. reach their maximum if the stock hits the higher strike price. Profit and loss are limited and well-defined. The initial Contains two puts with the same net credit is also the maxi- Bull Put Spread Net Position expiration but different strikes. The mum potential profit. Profits Bull Put Spread strike price of the short put is above at expiration start to erode if + (Credit Put Spread) the strike of the long put, and will the stock is below the higher 0 50 55 60 65 70 generate a net cash inflow (net cred- (short put) strike, and losses - it) at the outset. reach their maximum if the stock falls to, or beyond, the lower (long put) strike. Profit and loss are limited and well-defined. The net Contains two puts with the same premium paid at the outset Bear Put Spread Net Position expiration but different strikes. The establishes the maximum Bear Put Spread strike price of the short put is below + loss. The maximum profit is (Debit Put Spread) the strike of the long put, and will re- limited to the difference be- 0 50 55 60 65 70 quire a net cash outlay (net debit) at tween the strike prices, less - the outset. the debit paid to put on the position. Profit and loss are limited and well-defined. The net Contains two calls with the same Bull Call Spread Net Position premium paid at the outset expiration but different strikes. The establishes the maximum Bull Call Spread strike price of the short call is above + loss. The maximum profit is (Debit Call Spread) the strike of the long call, and will re- limited to the difference be- 0 50 55 60 65 70 quire a net cash outlay (net debit) at - tween the strike prices, less the outset. the debit paid to put on the position. The primary benefit of using an Iron Condor is that mar- Short Condor Net Position gin for only one side of the Made up of a Bear Call Spread (Cred- trade is required for both + Iron Condor it Call Spread) and a Bull Put Spread a Bear Call Spread (Credit (Credit Put Spread). Call Spread) and a Bull Put 0 50 55 60 65 70 - Spread (Credit Put Spread) while benefiting from the potential profit of both. 4 www.simpleoptionstrategies.com EXPLANATION OF OPTIONS Options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. Each contract is typically worth 100 shares of the underlying stock. For Indexes and Futures, settlement at expiration is assigned on a cash basis since there is no asset as there would be for a stock. OPTION TYPES Gives its holder the right to buy 100 shares of the underlying security at the strike price, anytime before the option’s expiration CALL OPTION date. The writer (or seller) of the option has the obligation to sell the shares. Gives its holder the right to sell 100 shares of the underlying security at the strike price, any time before the option’s expiration PUT OPTION date. The writer (or seller) of the option has the obligation to buy the shares. Options can be sold or bought back by the holders at any time before they expire. 5 www.simpleoptionstrategies.com OPTIONS PRICING INTRINSIC VALUE INTRINSIC CURRENT STRIKE (CALLS) VALUE* STOCK PRICE PRICE A call option is in-the- money when the underlying security’s price is higher than the strike price. INTRINSIC VALUE INTRINSIC STRIKE CURRENT (PUTS) VALUE* PRICE STOCK PRICE A put option is in-the- money if the underlying security’s price is less than the strike price. TIME VALUE INTRINSIC OPTION INTRINSIC VALUE* PREMIUM VALUE* Time value is any premium in excess of intrinsic value before expiration. *Only in-the-money options have intrinsic value. It represents the difference between the current price of the underlying security and the option’s exercise price, or strike price. The Intrinsic Value cannot be negative. 6 www.simpleoptionstrategies.com THE GREEKS The option’s delta is the rate of change of the price of the option with respect to its underlying security’s price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price. Far DELTA out-of-the-money options have delta values close to 0 while deep in-the-money options have deltas that are close to 1 Delta is also often used as a probability factor the strike price may end up “in the money” at expiration. So a delta of .10 means approximately that there is a 10% probability that the associated strike Δ price will end up in the money at expiration. The option’s gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage or decimal and reflects the change in the delta in response to a one point movement of the underlying stock price. Like the delta, the gamma is constantly changing, even with tiny movements of GAMMA the underlying stock price. It generally is at its peak value when the stock price is near the strike price of the option and decreases as the option goes deeper into or out of the money. Options that are very deeply into or out of the money have gamma values close to 0. Γ The option’s theta is a measurement of the option’s time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the THETA theta of an option reflects the amount by which the option’s value will decrease every day. The closer the Strike is to expiration, the greater the rate of premium decay. Θ The option’s vega is a measure of the impact of changes in the underlying volatility on the option price.
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